Zara Case Study

ZARA: A CASE STUDY GROUP MEMBERS

HISTORY OF ZARA • • • • •

Zara is a Spanish clothes and accessories brand, it is the flagship brand of the inditex group. Amancio Ortega Gaona, founder of Zara, started his career as clerk before starting his own housecoat manufacturing business in 1963 Amancio Ortega opened the first Zara store in 1975 in La Coruna, Spain. By 1989, there were 82 Zara stores in Spain. Gradually Ortega began international expansion with Zara stores in Portugal, Paris and New York. Zara is a high fashion concept offering apparel, footwear and accessories for women, men and children, from newborns to adults aged 45.

HISTORY OF ZARA •

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In 2001, Zara was a world brand with 1200 stores in all around the world. Zara offered clothing for women-about 58% of sales, men-about 22% of sales and children- about 20%.

THE TEXTILE AND APPAREL INDUSTRY ● In 1999 global textile & apparel industry accounted for 5.7% of production value of world ● ● ●

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manufacturing output Clothing market in major countries was estimated at $580 billion (US & Europe being prominent) Apparel production flow : Fabric Procurement => Design Preparation => Fabric Cutting => Sewing & Finishing 3 Types of production quality : 1. High quality segment 2. Medium quality 3. Low quality Low wage countries - production volume : Medium quality & Low quality segments Maintaining margin by more precisely meeting high quality demand was important to profitability Factors considered for production sourcing : 1.Raw material quality & availability 2.Worker skill & wages 3.Transportation time 4.Cost 5.Political & Foreign exchange risk 6. Quotas & Tariffs

THE TEXTILE AND APPAREL INDUSTRY IN EUROPE AND SPAIN • •

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2 million employee which accounts for 7.6 percent of people of E.U. Itlay largest with 31% of apparel and textile business followed by UK, Germany and Frane The large firms like Inditex also gave work to subcontractors. E.U special strength was design driven manufacturing where the production was close to customer and people didn't wait for long for clothes. Significant volume of outsourcing from mediterranean countries and quality monitored easily

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In spain in 1990 people became more fashion conscious and demanded better fashion. There was a sudden surge in the economy and that’s why people became more brand conscious. Galicia example was a one which showed as to why people started earning more and reduction in unemployment. In Galicia people were employed in various textile industry and by 1998, 29 thousand people worked for more than 760 firms. Galicia share of production increased from 7 to 14 percent. Currently Galicia produces 48% of the total apparel and textile leaving behind catalonia

THE ZARA MODEL - PLANNING AND DESIGN CYCLE • A year in advance of actual seasons- Spring/Summer in Jan/Feb and Fall/Winter in Aug/Sep • 200 designers – worked in large open spaces

• One design centre for each women’s, men’s and children’s clothing lines • Sketches made by hand and then moved onto CAD software for detailed drawings • Design centres- light and modern with pop music in background • Store specialist in the same room – reviwing the daily sales and connecting with store managers – each for a region • Communication and workflow withing the design centres we’re fluid

THE ZARA MODEL – PATTERNS AND SAMPLES • Designs sent to third party suppliers to prepare samples • Paper pattern and samples – in house by working in the large open working centres • Finalised patterns made available to computers to guide cutting tools • Initial collection finalised and shown within ZARA

THE ZARA MODEL – PRODUCTION, SOURCING AND SCHEDULING • Once collection is finalised – production plan and procurement of fabric stage initiated • Garments – third party sourced – 6 months prior to schedules store delivery • Outsourced production – 60% from Europe and 30% from Asia • Expertise, relative cost and time sensitivity- key factors in decision to oursource or produce in-house • Ensured that in-house manufacturing remained competitive through third party supplier bids among factory manager bids • A quarter of season collection was made available in start of season – inventroy in stores – basic items – initial fashion collection • In-house production •

85% in-season production

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15% next season production

THE ZARA MODEL –IN HOUSE MANUFACTURING • Two main steps • Fabric procurement • Garment assembly and finishing

• Fabric cut based on styles and sizes decided • Sweing subcontracted to 400 small firns within Galicia and Northern Portugal – helped in reducing the problem of unemployment – Turnaround time of 1-2 week • Pressing, tagging and inspection occured once the products arrived back to the Zara factories • Start to finish of a style production within 10 days

THE ZARA MODEL – IN SEASON PRODUCTION • Committed 50-60 % of production in advance of a season • In-house production of the in-season to easily reflect the market demand- product line could be stopped if market response is low • Produce to meet demand to extent of fabric stock available • In season replenishment did not require incremental capacity – ongoing reallocation of resources with minimal disruption

• In-house capacity available and reserved for – decision on what to manufacture determined within a few weeks of when garments would appear in the store

THE ZARA MODEL- DISTRIBUTION •Ten distribution centers across Spain currently. •Location of DC is between the manufacturing plants •Movement of garments across the DC: • Hanging garments on coded bars- Automated • Stockpicking- Manual • Chutes used to move garments to a box based on bar code

THE ZARA MODEL- DISTRIBUTION •Movement capacity of about 2.5 million garments •New DCs built keeping in mind growth plans •Twice a week shipments sent by truck to Europe and airfreight to stores outside Europe •Stores received goods within 24-36 hours within Europe and within 1-2 days outside Europe •No inventory at stores that was not on the selling floor

THE ZARA MODEL- RETAILING •Final allocation of inventory made centrally •Stores received new inventory several times a week •Customers visit the stores 17 times on an average, compared to 3-4 times for competitors •Items not sold returned for reallocation or outlet sale •Only items previously in stock marked down for sale •No need for large inventory clearance in system •Only 15-20% sale of season volume compared to 30-40% of competitors •Zara does not advertise

THE ZARA MODEL- THE STORES •Uniform ambience across all stores •Stores located at prime areas – Lexington Avenue in NYC, Champs Elysees in Paris, Regent Street In London •Color coordinated and uncluttered arrangement of goods differentiated the stores from other stores

THE ZARA MODEL- PRICING STRATEGY •Cost plus target margin pricing strategy adopted •Printed price tags for multiple jurisdictions showing different prices by country •This simplified tagging procedure and permitted movement of goods between stores within and across countries, without retagging •Use device that reads the barcode and prints price currently

THE ZARA MODEL- GROWTH STRATEGY •Outlets that are company owned, franchises and alliances •Over 2200 stores across 93 countries •Currently there are about 20 stores in India •Entered India through a JV with Trent, the retail arm of Tata group in 2010

SOURCING DILEMMA Proportion of outsourced manufacture from china to grow initially to 60% Take Advantage of the low cost production from china due to lower wage. Its a conservative step to built higher margins off lower wage cost. Will this decision affect the local in-season production?

SOURCING DILEMMA

SOLUTION •

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Many rival counterparts of Zara such as H&M, Gap, etc. now are seeking to lower costs by outsourcing production to developing countries, whose wages of labor are relatively low. However, the disadvantage of this method is that it lacks the flexibility in the production process because it is forced to place production orders to manufacturers overseas at least 6 months in advance of the season. Zara produces 60% of its own products.The company mainly relies on its own design team, complex fabric sourcing, cutting, dying and sewing facilities at the headquarter in Spain. It also helps create a rapid product turnover since the manufacturers can easily keep a close watch on the production process and strictly control inventories as well. As a result, this rapid product lifecycle naturally creates an urgency and scarcity for Zara’s retail stores, which increases the chance of each consumer to visit the stores and buy the products.

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Although the wages of their European workers are roughly 5-7 times higher than those of their developing-world counterparts, the turnaround time is totally worth it. This stunning strategy allows the business to sell more items at full price. Zara gets 85 percent of the full price on its clothes, while the industry average is 60 to 70 percent. Only about 18 percent of Inditex clothing doesn’t sell well and must be discounted. That is half the industry average of 35 percent. Each year Zara launches 10,000 new styles, compared to 2,000-4,000 for H&M and GAP respectively. With its range of clothes constantly being updated, one of two slow-selling items are unable to hurt company’s profits. Customers are also more likely to visit its shops regularly to see new stock. In fact, Zara holds 6 days worth of inventory, while H&M holds 52 days and GAP holds 94 days of inventory.